ASIC’s Gibson lays down the law

As a poacher turned gamekeeper,
Belinda Gibson
brings a pragmatic approach to her role as the corporate regulator responsible for ensuring boards of directors don’t repeat the mistakes that delivered shareholders billions of dollars in losses in the global financial crisis.

Thanks to Gibson, boards now have a handy guide for avoiding the related-party transaction financial disasters that occurred at busted companies such as Allco Finance, Babcock & Brown, ABC Learning and MFS Group.

It did not go bust but if there is a pinnacle of related-party complexity, the prize would go to Centro Properties Group.

It is clear that one of the biggest ­lessons from the global financial crisis was that the sections of the Corporations Act relating to related-party transactions are too vague. They focus on the need for directors to consider the materiality of transactions involving related parties.

But that left too much wriggle room for the financial engineers at B&B, Allco and MFS to get involved in transactions that involved ­purchasing assets from related parties. It was never clear if the deals were done at inflated prices.

Transactions that were said to have been done at arm’s length were later often found to have used a definition of arm’s length that would not necessarily stand up to closer scrutiny.

However, care should be taken in loading all the blame for mistakes made during the GFC at the feet of directors. Australia’s big four banks were caught up in the disasters as much as the boards. You only have to look at the huge loan write-offs by the banks in relation to the aforementioned companies.

Gibson, who is deputy chairman of the Australian Securities and Investments Commission and worked as a corporate lawyer at Mallesons, is using regulatory guides to provide directors with a ­better understanding of what is and is not acceptable.

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A regulatory guide is a way for ASIC to provide its interpretation of court judgements and build a framework for best practice. It is not a foolproof way to stop directors from allowing conflicts of interest to overcome good judgement.

But it is a way of heading off problems before they occur. Boards of directors that want to push the boundaries of materiality can still do so. But they will risk being taken to court by ASIC, which is giving them fair warning with yesterday’s release of regulatory guide 76.

Gibson put it well yesterday when she said: “By definition, many related-party transactions involve a conflict of interest. Related parties are often in a position to influence the decision on a proposal, the terms under which it might proceed, and the sharing of economic benefits between stakeholders."

Disclosure is the key to clarifying the situation with related-party transactions. Gibson says investors who are making decisions about whether to acquire a security, or a managed investment product, are entitled to be fully informed about all ongoing related-party arrangements with the entity. This means that they can assess whether directors’ or other related parties’ interests may not be fully aligned with their own.

Gibson says that investors should have information about related-party dealings, even for dealings that may be considered insignificant on their own.

She says that what may be material to members is the fact of the dealing with a related party, or the combined value of related-party dealings.

What is likely to follow from the release of this guide is more transactions being put to shareholder votes.

Private equity suffered another blow to its reputation with the voluntary administration and subsequent receivership of
Colorado Group
, which includes a stable of brands that – for the most part – will be coveted by others in the ­industry.

Colorado Group suffered from three problems: it had too much debt, it dropped the ball on the management of the Colorado brand and it was hit by consumer conservatism towards retailing.

A decade ago, Colorado was one of the top independent lifestyle brands in Australia. That reputation and success was built on its footwear products. But over the past five years, under private equity’s ownership, the brand’s image became muddied.

It strayed into the sale of apparel that was not sufficiently differentiated from its competitors. Also, it was hit with much tougher competition from half a dozen companies, led by Kathmandu.

Hong Kong-based private equity group Affinity Equity Partners made the mistake of loading the company up with too much debt as a result of its hostile takeover bid for the group in 2006.

That full takeover of the company was not resolved until
Solomon Lew
’s shareholding was bought out at a premium to the earlier offer price. Lew is likely to be in the queue to buy some of the more successful brands in the Colorado Group portfolio such as Mathers, JAG and Diana Ferrari.

However, it is unlikely that the sale process will result in the syndicate of 18 financiers owed $400 million ­being repaid in full. In fact, it is highly likely that they will lose several hundred million dollars.

The Colorado Group’s budgeted earnings before interest, tax, depreciation and amortisation for the year to June 2011 is $18.6 million. This number was recently slashed from $53.9 million.

It is believed that the Colorado brand, which had sales of $107 million in 2010, will lose $12 million.

The private equity owners fought a last-ditch battle with financiers to keep the business alive and avoid going under.

They put forward a proposal to create a sustainable capital structure that would support the growth of the business, and they claimed to have offered the lenders “significant upside potential".

But the rescue plan, which was prepared with assistance from KPMG, was not accepted by the required number of borrowers. The board and the lenders played a game of bluff for several days this week. The banks were unwilling to put the company under because of the implications this would have for relationships with suppliers and landlords.

However, once the board had put the company into voluntary administration, the appointment of Ferrier Hodgson partners James Stewart, Brendan Richards and Will Colwell happened within a matter of hours.

The board blamed the company’s problems on the difficult retail ­environment in Australia.

It is not clear whether a report prepared for the lenders by an arm of Ferrier Hodgson–called National Consulting Group – influenced the lenders to stop providing any further lenience towards Colorado Group.

But once the company had breached its lending covenants it lost its bargaining power and was unlikely to retain its independence.

Stewart from Ferrier Hodgson is well versed in handling the receivership of retail businesses. He handled the collapse of Australian Discount Retail, which owned Crazy Clark’s, Go-Lo and Sam’s Warehouse. Its chain of $2 shops had annual revenue of $1 billion. But its lenders had only a $100 million exposure to the business and they were repaid in full.

The collapse of Colorado, in effect, marks the unwinding of the last of the boom-time private equity deals in the retail sector.

Some big names in Australian broking will be keen to talk to
Bell Financial Group
chairman
Colin Bell
about their future after the company agreed last night on the new management structure for the group that will be in place from June 30. The Bell takeover of Southern Cross Equities occurred in September last year but the deal will not be completed until June 30. The Bell Financial board met yesterday ahead of the three-month earn-out for those leaving the merged firm.

But no final decisions on departures were made. As expected, the young guns from Southern Cross have been given some of the top positions at Bell, edging out a group of industry veterans at the firm.

Alastair Provan
will remain as group managing director of Bell Financial; Bell’s Victorian manager, Dean Surkitt, will become head of retail for the group; Southern Cross head of dealing Charlie Aitken will become Bell’s managing director, wholesale; James Unger, who is Southern Cross head of institutional dealing, will be head of corporate finance; and the head of research at Southern Cross, Steve Goldberg, will be head of research for the group.

Now that the key positions have been filled for the entire group, the chairman will hold discussions with those brokers at Southern Cross who have roles that are overlapped by the new appointments. Legendary broker
Brent Potts
, who is executive chairman of Southern Cross and an executive director of Bell Financial, is likely to have discussions with the chairman about his future.

One thing is clear, Aitken is in the box seat to replace Provan as the next managing director of Bell Financial.